Macroeconomics: The Day Ahead for 19 August

  • Digesting UK Consumer Confidence, Retail Sales & PSNB, German PPI and hawkish Fed speakers; awaiting Canada & Mexico Retail Sales on otherwise thin day for data; monthly equity options expiry; Deere & Co earnings; PMIs, surveys and Jackson Hole in view for next week
  • UK: Retail Sales better than expected, but likely to be transitory reprieve, as Consumer Confidence slides to new all-time low: PSNB a reminder that new Conservative leader to face spending constraints
  • Germany PPI: total shocker paced by huge surge in energy prices, but also signals broad based pipeline pressures, piling pressure on ECB, but rate hikes will not resolve underlying problems

EVENTS PREVIEW

The week ends with a relatively light data and events calendar, dominated by the overnight UK GfK Consumer Confidence and Retail Sales, along with Japan’s National CPI (as expected) and a spectacular rise in German PPI, with only Polish Industrial Production and labour data, Canadian and Mexican Retail Sales ahead, none of which are likely to fire up markets’ animal spirits ahead of the weekend.

Fed’s Barkin is the sole scheduled central bank speaker, while the corporate earnings run has a number of second China financials, CNOOC, Xiaomi and Newcrest Mining, with Deere & Co heading a smattering of results in the USA. While monthly equity index and stock options expiries are generally minor, if not non-events, there is some concern that the recovery in US equity markets has been exaggerated by market maker ‘gamma hedging’, which has served to drive down volatility during the summer, and that with today’s expiry, a good deal of option protection will roll off, and potentially lead to a rather choppier environment. Next week brings the Fed’s Jackson Hole confidence, with Powell delivering the keynote speech on Friday, while the ECB publishes the ‘account’ of its August meeting.

Surveys dominate the data schedule via way of flash PMIs, Germany’s Ifo Business Climate and a rash of other business and consumer confidence measures, with the US also looking to Personal Income & PCE, Durable Goods, Advance Goods Trade Balance, New and Pending Home Sales. Japan publishes Tokyo CPI, and inflation data also tops the EM schedule, with readings from Brazil, Mexico and South Africa.

** U.K. August Gfk Consumer Confidence & July Retail Sales **

Summer sales discounting gave Retail Sales a much needed, though tepid boost, with the 0.3% m/m rise better than the forecast -0.2%, and ex-Autos up 0.4% vs. expected -0.3%, and thus registering the best m/m rise since last October, which underlines just how weak consumer spending has been, and still is. Given that the Gfk Consumer Confidence fell to a fresh all-time low of -44, with expectations for major purchases, personal finances and the economic situation all declining, it is safe to assume that the Retail Sales are little more than a welcome temporary reprieve. The slightly larger than expected July PSNB (deficit of £4.18 bln) serves as a reminder that the tax cut and spending pledges being bandied around by Sunak and Truss are likely to get a sharp reality check, whichever one moves in to 10 Downing Street in September.

** Germany July PPI **

An absolute shocker is the only way to describe the latest German PPI data with a whopping 5.3% m/m rise jumping the y/y rate up to 37.2% y/y, and underlining the scale of extant pipeline price pressures. Unsurprisingly energy was the primary driver rising 14.7% m/m for an eye watering y/y rise of 105.0% y/y, but the second round pressures are broad based with Capital Goods at 1.0% m/m, Durables 0.9% m/m & Non-Durables 1.3% m/m. While this piles on the pressure on the ECB, this will not be resolved in any way by rate hikes, and the demand destruction that this is inflicting is already very obvious.

** Turkey TCMB rate cut **

As has been the case for some time, TCMB policy continues to fly in the face of any form of economic orthodoxy with yesterday’s 100 bps cut to 13.0%, because the TCMB is completely hostage to political will, i.e. President Erdogan’s diktat. CPI is 79.6% y/y and rising, with the TCMB expecting a peak at 85% in coming months, most others forecasting 90-95%. TCMB cited weakness in orders and output, which has been evident in the past two months Manufacturing Real Sector Confidence survey, with both domestic and export orders falling. The latter is unsurprising given that around 95% of its manufacturing exports going to the EU. But just when some easing of oil prices might have started to help with inflation, another shot in the foot has been administered, and the TRY fell, and thus forcing the TCMB to waste scant FX reserves (which had gotten a boost after money transfers from Russia for the construction of a nuclear power plant in recent weeks, as well as a good tourist season). Presumably it or Erdogan may be hoping that by adopting the Russian Mir payments system, the banking sector might see some inflows, from those circumventing sanctions. On the other hand a 13.0% 1-week repo rate is not a reflection of where commercial lending rates are, which is around 30%.

While Turkey’s corporate debt to GDP ratio is low for a developing economy, playing roulette with dysfunctional policy making is not going to attract much needed foreign investment or help out beleaguered local banks, and cosying up to Russia and Iran hardly looks like an antidote to its deep seated malaise, and despite its obviously huge potential. A change of government at next year’s election looks like the best hope for Turkey’s economy, but any new government will still have a big mess to sort out.

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Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2021 ADM Investor Services International Limited.

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